For students of Mr Koh’s Bukit Timah Economics Tuition Programme – as an Economics tutor, I emphasise the need for students to understand dynamic analysis in different economic concepts e.g. why CA changes, how different events affect firm profitability, or how market structures can change over time.
Dynamic Comparative Advantage Aka Reasons for Changing CA
Listed below are reasons why a country’s Comparative Advantage might change over time. Students in my Bukit Timah economics tuition should be familiar with these factors, on top of understanding how to explain the Theory of Comparative Advantage.
Changes in factor endowments
Changing CA can be attributed to changes in factor endowments within a country, which may be due to excessive resource exploitation, e.g. China’s loss of CA in labour-intensive goods due to rising wages (attributed to heightened demand for labour to produce goods for exports, coupled with slower population growth), or erosion of Brunei’s CA in oil production due to resource depletion. Conversely, a country can acquire a CA with discovery of new resources or new methods of extracting resources. A case in point would be how the United States has made use of fracking technology to build up its CA in oil production.
Countries can develop new areas of CA through government investment into research and development. For example, Singapore is developing its CA in the area of satellite technology in order to stay ahead of competition. Specifically, the Economic Development Board established an Office for Space Technology and Industry and directed funds to engage industry experts to drive innovation in this new sector.
Given the mobility of factors of production across international boundaries, a country is also able to develop new areas of CA by tapping on foreign resources. For example, notwithstanding Singapore’s lack of a sizeable labour base, tapping on foreign labour has allowed Singapore to circumvent her resource limitations, and become a major hospitality and tourism hub.